published-date Published: April 3, 2024
update-date Last Update: June 28, 2024

Full-Time Trader Shares His Risk Management Strategy on TradeLocker – Astronaut Auditorium #8

Alex, a full-time astute and profitable trader, was hosted by Astronaut Auditorium to share his strategies about risk management, overviewing the trading risk control measures and preventions.

Providing a snapshot of Alex’s background and inception in trading, he started his trading career five or six years ago with little knowledge and experience like any newcomer in this field.

However, with his consistent hard work and passion to achieve his goals, he garnered remarkable accomplishments in trading ventures, anticipating many substantial achievements in coming years.

In a podcast with Antonio, he reflected on many of his risk management approaches. Risk management is one of the most crucial aspects in trading, no matter which type of trading you are in. If the trader has a great knowledge and experience about the market movements and risk appetite, he will be going to succeed as a trader.

Risk management is basically evaluating the potential loss size weighed against the original profit for every new position in the market, understanding every risk/reward ratio to safeguard yourself from black swan events.

Fundamental tools for executing strategies while managing the risk

Alex asserted that Stop-Loss and Take Profit are the indispensable assets for managing risk and executing the strategies while trading.

Determining the balance between the risk and reward to increase the profits and cut the losses is a substantial approach for risk management, depending on your risk tolerance and trading strategy.

Without well-established stop-loss and take profit levels, the trade can unexpectedly turn against you and change direction to negative. So, the strategy focuses on setting notable stop-loss levels and profit-making exit points to limit loss and lock profit, maintaining controlled risk management.

How important is to Identify a appropriate position size to minimize risk

Alex explained the importance of position sizing, stating that if the trade moves against the entry points, most traders start adding more and more to their position size, called averaging down.

It endangers their account and reduces the return chances, causing significant risk of loss if the market does not move in their favor.

  • The strategy to apply here is simple and ensures minimum loss. You should immediately cut the losses and stop adding positions if there are no upward movements anticipated.
  • By directing the position sizes, you can verify the risk alignments with the risk tolerance, safeguarding you from taking more risks.
  • Alex gave the example of a casino analogy to make us understand the importance of risk management without increasing the position size when you are going down in a negative direction. He asserted that protecting your money with the goal to increase the profits is the same rule in trading and gambling.
  • Stop following the crowd in trading to manage risk

One of the common things to encounter in trading of newcomers is emulating the crowd, thinking they are invincible and foolproof. It will make them incapable of executing their strategies, causing self doubt, insecurity, and decision-making.

Alex conveyed that no one is 100% perfect and every trader has some unsuccessful trades because trading is just a matter of chance or an uncertain game.

So, sustaining a constructive P&L (profit and loss) in trading acquires larger profits from successful trades compared to the losses from unsuccessful trades, like Alex having 65% win rate, ensuring good P&L every week.

He reflected on the idea of market makers, also called liquidity providers. They are like wholesalers for buying and selling securities by setting prices to reflect the market demands, controlling the risk from price fluctuations. On the other hand, retailers are the individuals with less expertise and experience and usually face more losses.

Tilt in trading: Throwing risk management out the window

Adding additional money or increasing the investment will decimate the account and you will be left with no money, causing emotional turmoil, and shaking your confidence to catch up with good trades in future.

Emotional agitation and frustration impact the strategies for managing the risk, leading to painful losses that are challenging to get back on track from.

Overcoming tilt states is the part of risk management, such as having a plan, knowing the drawdown parameter, staying calm and consistent, and trading in familiar markets are helpful approaches to stay focused despite the challenges.

Setting a profit limit to minimize loss risk

Setting a profit limit instead of daily profit goal is a significant strategy in risk management, sidestepping unnecessary risks.

For example, Alex remarked that it is wise of you to call it a day in trading if you are close to your target and come back the next day with a fresh mind for a new start.

Furthermore, some traders keep adding more position sizes if they lose two trades in a day to recover from the loss. However, it is a higher risk, leading to major setbacks and financial blow on overall account balance.

Overcoming or hedging the losing streaks

Due to the price fluctuations and market movements, even professional traders encounter losing streaks. The misalignment of your strategies with the market trends and range leads to consecutive losses.

Alex shares his viewpoints about dealing with such challenging situations without facing tilt. He said the trader should take a break for a few days to clear his mind from all stress and agitation of continuous loss and think about it with a different perspective.

It is better to shut down the screen and leave if the trade goes down continuously instead of adding more position sizes.

Moreover, reviewing the strategy and trade journals, reducing the risks, seeking feedback, and testing the new strategies will help overcome the losing streak.

Trading strategy based on market movement to manage risk

  • According to Alex, if you set the stop loss at the high of the day to cut the potential losses, you can take partial profit while permitting the remaining profit for the future when the trade moves by 20 points on NAS 100.
  • Owing to this, he reflected that he usually leaves his runner at break even or original stop loss to exploit extended market movements and secure prolonged price action.
  • In addition, taking trims, re-evaluating and analyzing the market movements, and closing out the day when you hit close to your goal are some approaches that Alex explained for risk management.
  • Furthermore, Alex reflected on another essential strategy for risk management. He stated, “I make sure not to over-leverage by setting a maximum position size based on my account size.” You should never go beyond 0.1 or 0.15 position size if you have $2000 in your account, reducing the risk especially in crypto markets.